For the first time in five decades, deflation has returned to the UK and the retail price index has fallen to -0.4 compared to the same period last year. Stephen Walker argues that leaders now need to focus on the skills and motivation of their workforce to deliver customer value.

The bogeyman of deflation is stalking the land yet few people, outside of Japan, have much experience of it. It seems like only a few months ago we were all concerned that the inflation beast had re-awakened.

The financial pundits express concern at the way deflation feeds on itself. As prices fall people delay purchases in the expectation that the price will be lower next month. In the face of falling sales, prices are cut to boost demand and price deflation surges.

Some countries have been particularly exposed to the collapse of the banking system. Countries with a (then) relatively large financial sector with an independent currency have been badly hit. The collapse of tax revenues, the massive government spending and the perceived risk of sovereign debt default has put pressure on the exchange rates of those countries’ currencies.

"It isn’t enough for people to have the skills. They need the willingness to use them to create customer value for your organisation."

Falling exchange rates create inflationary pressures through import prices. In the UK, food and fuel are the prime concerns as they are such a large part of the consumer price experience.

Organisations are to be faced with demands for reduced prices for their products and services while pressure for wage increases as basic living costs soar.

So much of the economic activity in the Western world is made up of services such as governmental organisations or professional services like solicitors and accountants. These entities charge on a cost plus basis, indeed the status of some jobholders is measured by how much they spend or how many they employ.

But there is one sector that has been used to reducing prices in the face of rising input costs – the industrial sector. Wage increases in industry are justified by increased effectiveness resulting in a reduced wage element of the unit cost. Clearly this sector has suffered heavily through the combined squeeze of output price deflation and input price inflation.

What is needed now is strong leadership to drive organisations in a search for effectiveness.

There needs to be:
 

• A drive for customer value
   
• A review of processes
   
• Effective performance management of people in relation to their skills and motivation

  A search for effectiveness is not just cost cutting. If you think stopping paying for chocolate biscuits or reducing staff by several thousand is the answer then reconsider what this does to your effectiveness.

  In fact now is the time to dust off that marketing mantra: be the lowest cost, highest value competitor.

  How many organisations have retreated into niches where their price/value mix still has some appeal? Would they know if their competitors are looking at their niche right now?

  
  The drive for customer value
  If you are the leader or manager, do you know what the value of your product or service is to your customer? You need to understand, better and faster than your competitors, what your customers value. I have yet to see any radical changes in customer value offers – please email me if you have examples where your organisation has made that change.

  Which of us works in an organisation that still uses “cost plus” as their pricing tool?

  Review of processes
  If you are responsible for the conduct of part of an organisation you are responsible for people, physical things and processes. Have you instigated an organisation-wide review of processes? I heard the phrase “zero based budgeting” again recently. As the leader you need to drive out the lazy “last year’s budget plus” planning process. Plan your processes from scratch aimed at enhancing Customer value.

  People’s performance management – skills
  There is no excuse for not managing your people’s skills. You have the processes defined so you know the skills needed to operate them. Equip your people with the skills.

  Consider your cost basis. Do people perform better, and be worth a pay rise, because they have been in the job a year longer?

  People’s performance management – motivation
  It isn’t enough for people to have the skills. They need the willingness to use them to create customer value for your organisation. The financial scandals plainly show the foolishness of relying on bonuses to drive performance. What gets satisfied is the bonus measuring system not the customer value generation system. I have never seen a bonus scheme that hasn’t been hacked by those operating it.

  It is lazy management. People need fair treatment, good pay but they need to be managed as people not piggy banks.

  I do despair at what I read today. The banks that were so eager for government money to save their jobs (and our jobs I might add) are now eager to pay it back in case it damages the bonus payment culture and their overall performance. This sounds like the alcoholic’s argument that all they need is a drink to steady their nerves!

  What now?
  I am afraid that nothing has happened yet. We still haven’t recognised that customers want better value. If our organisation doesn’t deliver it then another will. Will the consumer forget the 60% discounts of 2008 when it comes to Christmas 2009?

  We do have to do things differently so let’s put in some effort and do them better at the same time.

  What is happening in your organisation to give better customer value? Have you really done enough? What are your leaders doing to make a difference?

  After over 30 years of hands on business and academic experience, Stephen Walker co-founded Motivation Matters in 2004. The company is a management consultancy focused on improving people’s desire to perform well at their work. Motivation Matters works with organisations to improve the performance of their people through better management practice